A Trump win could slam markets, while a Clinton win looks priced-in

Republican
presidential candidate Donald Trump works a rope line after a
Town Hall on January 29, 2016 in Nashua, New
Hampshire.Getty
Images

After nine straight days of declines, stocks soared on
Monday — right on the edge of the 2016 election.

The
Mexican peso, which has become something of a gauge on
Republican candidate Donald Trump's prospects over the past
couple of months, also took off, rising by about 2.0%.

The surge followed Sunday's FBI announcement that
it had concluded
its probe into new emailsfound as part of its
investigation of Democratic presidential candidate Hillary
Clinton's use of a private email server while she was secretary
of state.

But that was Monday.

What everyone's really thinking about now is Tuesday. And
the rest of the week.

As things stand,
the market seesHillary Clinton as a known player whose
policies are expected to be largely a continuation of the Obama
administration's. Trump and his economic positions, however, are
less predictable and do not always follow party orthodoxy. And so
he is perceived as more of a political risk.

Given those parameters, and the fact that
major forecasters
think a Clinton win is more likely, John Higgins, chief
markets economist at Capital Economics, argued in a note
that "a victory for Hillary Clinton in today’s
presidential election is now heavily discounted. As a result, it
would trigger far less of a response in the markets than a
surprise win for Donald Trump."

"Equities in the US would probably be boosted further by a
Clinton victory, although we suspect that the upside would also
be limited given their latest gains and the prospects for Fed
policy and the dollar," he explained.

He added that the resulting stronger dollar would likely
boost stocks in other developed markets, and that emerging
market stocks could benefit from the likely increased
risk-on posture.

As for a Trump win, Higgins argued that things could pull in the
"opposite direction":

"For example, we think the S&P 500 would fall below 2,000,
compared to a current level of around 2,130. And many stock
market indices elsewhere would probably fare worse. The Nikkei
225 could be hit especially hard by accompanying strength in the
yen – we wouldn’t be surprised if it tumbled below 15,000,
compared to a current level of more than 17,000. And there would
probably a broad-based rout in emerging markets."

Deutsche Bank's macro strategist Alan Ruskin expressed similar
sentiments with respect to currency markets, noting that "there
is a case for zero cost one week risk reversal trades, where a
Clinton victory is fully priced and where a (major) surprise
Trump victory is under-priced."